Comparison with India and Japan

New applications of cryptocurrency and blockchain technology called non-fungible tokens (NFTs) are a hot topic in Taiwan. But at the moment, there are no regulations that specifically address their growth and development, and the regulator does not appear to have revealed any official view on the trend.

From a local perspective, the classification of any NFT and related activities or transactions should be determined on a case-by-case basis, referring only to existing laws and regulations.

SECURITIES AND FINANCIAL LAW

NFTs are typically structured to represent digital artwork, musical works, collectibles, sports cards and photo albums, and their classification will depend on the structure and associated assets or interests, among other factors.

In November 2021 and March 2022, Huang Tien-Mu, head of the Financial Supervisory Commission (FSC), noted that NFTs are considered works of art, so their sales offer should not be considered virtual currency. He also indicated that whether NFTs should be regulated in the future will depend on factors such as their implications for financial stability, among others.

So it seems that if NFTs represent “art creation”, they should not be regulated by existing financial laws and regulations.

The authors consider it less likely that NFTs will be considered securities or other financial instruments falling under existing financial instruments regulation, as long as the NFT is linked to (or represents) a unique underlying asset; and there are no more NFTs associated with or representing the same resource.

However, due to the possible investment nature of NFTs, the application of finance law and securities regulations cannot still be completely ruled out.

Interestingly, the FSC in July expressly prohibited local acquiring banks from allowing local credit cards as payment for virtual assets, and accordingly, local acquiring banks should not accept virtual asset service providers as contracted merchants for credit card transactions. The question that arises will then be whether virtual assets should be interpreted to include NFTs.

The authors understand that there have been certain discussions between relevant blockchain/crypto industry players and the FSC and local banking associations in this regard. However, even if the FSC held that NFTs should not be covered by the ban on virtual assets – as if they merely represent, for example, artwork or vouchers, and do not have the nature of an investment – ​​in practice it may not be easy for a local purchasing bank to confirm whether any NFT has the character of an investment.

So whether a local acquiring bank will accept an NFT-related service provider as a contracted merchant for credit card transactions should still depend on the bank’s internal judgment and decision on a case-by-case basis.

NFT CONTAINS RIGHTS, INTERESTS

Ownership of NFT assets depends on the structure and underlying assets. For example, after a transfer of an NFT representing a digital artwork to the buyer, the buyer as NFT owner has access to the underlying asset. But this does not mean that you automatically gain ownership of the content of the underlying digital artwork.

Depending on the terms and conditions, the NFT buyer may only have the right to view the digital artwork, and not gain ownership in any form (eg electronic files of the artwork).

For any NFT designed and intended to represent any physical asset – take sneakers as an example – the question may be whether the NFT transfer will amount to the transfer of the sneakers to the transferee. If so, Taiwan civil law will view the transfer as equal to a claim against the warehouse operator with whom the sneakers are deposited. The purchaser of an NFT may wish to carefully consider and understand all legal rights, titles and interests in and to the NFT before making the decision, from the perspective of the NFT itself and the assets and/or interests attached to it.

NFT creators or issuers may want to specify the rights the holder will acquire in the terms of offer (or equivalent), focusing on the accuracy of product descriptions and guarantees, as well as avoiding over-promising.

For example, the terms should not suggest offering a form of digital ownership behind the NFT when the holder in reality only has the right to see the asset and does not own the content. Otherwise, civil or consumer disputes or even criminal liability may arise.

In practice, it is also expected that there will be NFT marketplaces, platforms or exchanges where NFTs can be listed and traded. Like regular electronic trading platforms, standard terms and conditions for these marketplaces should specify the rights and obligations of registered users or members.

Before launching or allowing the listing of NFTs, marketplace operators must perform the necessary due diligence, commercial and legal, to avoid potential liability due to infringement or third-party claims by the creator or issuer. The agreement between the marketplace operator and the creator or publisher may need to clearly state what division of responsibilities may arise.

An offering of NFTs and access to underlying assets may also be subject to technology risks such as security breaches, unauthorized intrusion by hackers, service disruptions or technical failures in relevant networks, which may even lead to the unavailability of the offering. NFT creators and marketplace operators may wish to address the risks by incorporating reasonable disclaimers, to the extent permitted by applicable law.

IP RIGHTS

IP rights, especially copyright, can be a critical issue for NFTs if the underlying assets involve works of art, photographic works, musical works and recordings. NFT creators or issuers must obtain necessary licenses or authorizations from the IP owners before issuing NFTs.

NFT marketplace operators may need to implement relevant controls to mitigate the associated risks. It is important to ensure under market conditions that NFT holders only hold and exercise relevant rights and use of NFT, and do not infringe any third party rights, especially IP rights.

METAVERSE AND NFTS

The Metaverse, a term combining the prefix “meta”, meaning beyond, and the “universe”, usually refers to highly interactive virtual worlds or digital spaces accessible by technologies such as augmented reality (AR) or virtual reality (VR), and specific devices such as VR headsets and AR glasses. NFTs are perceived as a crucial element in this metaverse. For example, in traditional games, players pay to buy in-game assets, while most in-game assets are only licensed to players, and may even be withdrawn by publishers. Some industry players believe that this can be solved by tokenizing the assets and creating NFTs for games, enabling the concept of portable game assets – in-game assets that can be taken out of the game or transferred across multiple platforms – to be made possible.

From a legal perspective, if this is the real intention of the game publisher, the publisher may first need to change the terms that apply to the game so that an NFT buyer can truly “own” the underlying game asset, depending on the structure of the game. The NFTs. Since the original game assets are subject to the applicable terms and licenses granted by the publishers, an agreement between publishers may be required to allow the game assets to be moved or transferred between different platforms, or between games.

ANTI-LAUNDERING

In terms of digital currency platform operators and transactions, the latest amended Anti-Money Laundering (AML) Law has brought virtual currency platforms and trading companies into Taiwan’s regulatory regime, where enterprises falling within the specified scope will be subject to relevant rules that apply. to financial institutions.

In April, the Executive Yuan (Cabinet) issued the AML Ruling, which interpreted the scope of businesses in virtual currency platforms and trading companies. The FSC followed suit by promulgating AML regulations governing the law and countering the financing of terrorism for businesses with virtual currency platforms and trading businesses. Under the regulations, designated operators of crypto-asset platforms and trading firms are required to establish internal control and audit mechanisms, suspicious transaction reporting procedures and know-your-customer procedures, among others. Both the ruling and the regulation entered into force in July 2021.

It is unclear whether NFT market participants fall within the specified scope described under the AML judgment. The key question will be whether the term “virtual currency” under the ruling will also be interpreted to cover NFTs. If so, relevant market participants – in particular marketplace operators and any business operators providing NFT custody-related services – will be obliged to comply with the AML regulation and perform the above obligations.

The authors believe this will significantly increase compliance costs for relevant NFT market participants. Considering that trading NFTs in practice can involve a huge amount of money, which can to some extent justify any potential AML obligations, industry players are advised to follow the regulatory trends closely.